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Suil Lee

The author carries out empirical analysis on potential and actual competitive pressure from the foreign sector on the profitability of domestic industry in Korea, in order to identify the importance of the foreign sector on competition in the domestic market. Estimation results show that potential competitive pressure, defined as a response of imports to changes in an industry’s profitability, operates in Korea with a one-year time lag. There is, however, no empirical evidence of the existence of actual competitive pressure—the negative impact of increasing imports on industry profitability. The author concludes that imports increase in response to increases in the profitability of the domestic industry and that importers may choose to enjoy higher profits by stringing along with domestic firms rather than fiercely competing with them.